Terex: Still Expecting The Margin Improvements

| About: Terex Corporation (TEX)
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A year after originally writing about the key margin improvements expected at Terex Corporation (NYSE:TEX), the amounts are still a future expectation. In fact, back in 2009 the company originally presented the expectations that operating margins would increase to 12% by 2013. The number though still languishes around 6% on a yearly basis.

The company remains a leader in the manufacturer of machinery and industrial equipment focused on aerial work platforms (NYSE:AWP), construction, cranes, material handling and port solutions (MHPS), and materials processing segments.

As highlighted last year, the company plans to be the leader in particular niche machinery and industrial products, but it doesn't maintain the operating margin levels similar to other machinery leaders. Both Caterpillar (NYSE:CAT) and Joy Global (NYSE:JOY) have been able to maintain margins over 10%, so the question remains whether Terex will ever be able to join that group. While these top margin stocks are trading closer to 52-week lows, the ability of Terex to sit closer to the highs suggests the market might finally be supportive of a real margin expansion.

Reduced Guidance

While the stock did plunge back in June when the company reduced earnings guidance, it actually trades higher today. The fact that the stock rebounded even after the weak numbers suggests the internals are better than it would appear on the surface.

At the time, the company guided to earnings between $1.90 and $2.10 for 2013. The reduction was a significant $0.55 on average. The blame was placed squarely on a softer marketplace for construction and port solutions due to a challenging environment in Europe.

Nonresidential Construction To Help

At the recent Citi Global Industrials Conference, CEO Ron DeFeo mentioned on several occasions that some business wouldn't improve until nonresidential rebounds. If that holds, the recent Architecture Billings Index, or ABI, shows some good signs for Terex. The diffusion index of U.S architecture firms serves as a leading economic indicator that leads nonresidential construction activity by approximately 9-12 months.

The index has been extremely bullish with a positive reading in twelve of the last 13 months. In August, the index recorded a 53.8 and reflected the strongest growth in activity in the last six months. See the below activity chart over the last year:

As the below slide from the recent investor presentation highlights, the Q213 results had 42% of revenue from North America. A good sign if the U.S. nonresidential market rebounds, but the company has historically obtained only 35% from North America.

2015 Goals

Anybody following Terex for the last several years is probably familiar with the long-term targets that the company regularly throws out. While the company has generally improved revenues and margins over the last few years, it hasn't been able to achieve those ultimate goals.

The most important long-term goal has been the achievement of 10% operating margins, but the best the company hopes to reach is 7% for this year. The 2015 goals are probably achievable, but investors are likely to remain skeptical considering the significant failure to reach these same goals by 2013.

The biggest part of the goal is to turn around the losses in the construction and MHPS segments into significant margin contributors. Most importantly, the MHPS division will need to jump to a positive 7.5% margin from the current negative margin. If the goals are met, operating earnings would double from slightly below $500 million in 2013 to at least $1 billion in 2015. Terex does hope to grow revenues roughly 30% during those two years to contribute to the higher earnings, but no doubt the question is whether this company can deliver on the higher margins.

Industry Leading Margins

As with last Oct., the question continues to remain with whether Terex can generate the same margin levels of other heavy equipment manufacturers. Caterpillar and Joy Global remain examples of where Terex and crane competitor Manitowoc (NYSE:MTW) want to reach. Now in the crane segment, Terex expects to hit around 8.5% this year and reach 11.7% in 2015. A level below 12% would typically lead Caterpillar to restructure operations, yet at the high end of the current goals for Terex.

TEX Operating Margin Quarterly Chart

TEX Operating Margin Quarterly data by YCharts

Stock Looking Good

Sure the stock market has been good over the last few months, but the price action in Terex has been encouraging compared to Caterpillar and Joy Global. Terex appears set to break to new 52-week highs and those previous cycle leading stocks actually appear potentially set to break to new lows.

Chart - 1 Year


The operating margin story still isn't good enough at Terex, but a rebound in Europe and a strong domestic nonresidential construction market could solve those problems. The company has spent the last several years restructuring operations to be the leader in cranes, port handling, and AWP so now could be the time to harvest all that work. Reaching the goal of earnings over $5 in 2015 would definitely lead the stock higher, but investors must be confident of a rebound in Europe of domestic construction to see the stock move much above the current $35.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.